Poor innovation activities at SMT (VN) co ,ltd

These solutions are not only support about capital resources through choose the bank with interesting attractive, professional process and more benefits but also give company the plan in

UNIVERSITY OF ECONOMICS HO CHI MINH CITY

International School of Business

-

Luong Thi My Lan

POOR INNOVATION ACTIVITIES

AT SMT (VN) CO., LTD

MASTER OF BUSINESS ADMINISTRATION

Ho Chi Minh City – Year 2018

UNIVERSITY OF ECONOMICS HO CHI MINH CITY

International School of Business -

4.2 Solution 2: Built up the training process and policy 24

Conclusion

SUPPORTING INFORMATION

REFERENCE

Executive information

The SMT Company is leading in textile industry about label manufacturing high quality base on the combination of high technology, customer‘s reliable and satisfaction, good management and high demand of market However, nowadays, in the completive market, SMT seem lost the top position because objective and subjective factors

Base on the symptoms is profit margin drop down, the main problem of this company was revealed is the strategy company does not invest machine and technology The reasons are point out three majors: the power of financial equity and the well-trained workload, in this situation, finance and human resources are the challenge for company Finally, the conception of director also related to run the business for company’s strategy These problems must solve quickly as it is indeed threatening the survival

Company suggests two positive solutions for cause problem are finance leasing and built up the training process and policy These solutions are not only support about capital resources through choose the bank with interesting attractive, professional process and more benefits but also give company the plan in human resource training by heightening labor awareness of training skill and knowledge, making training plan and plus more policy to encourage the labor with reasonable cost Based on these solutions, company conduct the action plan with people in charge such as CEO, CFO, Factory Manager … in time to improve the situation

This thesis also collects the data from financial and internal reports, refers the literature

by author and in-depth interview all persons with high position in charged for more details also interview other related employees to be executed fully understand the problem Additions, this thesis used formula is Gross profit margin = (Sale revenue – Cost of Goods Sold) / Sale revenue to clarify the symptom also used some kind of charts to analysis and compare the information in detail Meaning, this thesis presented the important problem and positive solutions also the action plan for main problem in positive

Introduction

Textile industry in general label industry in particular is the most important industry in Vietnam which not only solve about unemployment but also impulse the development of industry in Vietnam This makes textile industry essential for the Vietnamese people However, nowadays, when Vietnam joined the WTO, textile industry in Vietnam is facing more challenges such as the policies, culture and more strong competitors as Chine industry

SMT Vietnam Company is a Foreign Direct Investment company that specialized in providing cloth and shoes labels for textile industry Due to the fashion grow rapidly in Vietnam; at the begin 2003 SMT Company established which focuses on label producing by chain complex machinery

CHAPTER 1: COMPANY INTRODUCTION 1.1 Industry overview

Vietnam plays an increasingly large role in the World’s Textile & Garment Value Chain - its garment products exported to over 180 countries and territories The country poised a bright future ahead of becoming the world’s textile production center, and major garment makers are continuing to explore expansion and production opportunities in Vietnam There are around 6000 textile and garment manufacturing firms operating in Vietnam, 84% of which privately owned, 15% FDI, and remaining 1% are state-owned This industry employs around 2.5 million people in the country on an average wage of $239 per month Garment manufacturing accounts for 70% of the total businesses in this sector in Vietnam with CMT (Cut, Make, Trim) being the main method (85%) of export The apparel exports account for 11.5% ($24.61) of the country’s total exports (2016)

1.2 Company overview

SMT (VN) Co., Ltd is the Foreign Directly Investment in manufacture high quality labels In 2003, SMT was established by the main director is Thailand woman and have two working location include one head office in TanBinh district and one factory in Cu Chi

district That location is useful for transport and production The main products are woven and printing labels to provide for the business of Footwear / Garment / Bags/ Accessories items, etc., SMT Vietnam has good environment working also well-trained technicians with much talented and skillful teamwork We are now major supplying our woven labels to main customers i.e Nike/ Reebok/ Timberland/Adidas/ Pierre Cardin/ Puma in Vietnam market and many brand name customers in Asia countries also enhance our customer’s brand name in worldwide market Moreover, over 15 year, SMT already has exported woven labels to USA, EU, Hong Kong, Singapore, China, and Australia annually

CHAPTER 2: PROBLEM IDENTIFICATION 2.1 Problem finding process

In order to identify the company’s problems, these following steps executed:

Reference the data of report’s company to understand the symptoms and positive problems Review the literature related to the symptoms and accounting data of industry

Interview all persons who in charged for more detail:

 Mr Tran Quoc Bao - Director of factory

 Mr Nguyen Luong Bang – Director of sale and customer service department

 Ms Ho Loc Ly – Finance manager

 Mr Ky Ngoc Minh – HR manager

 Ms Wanpen – CEO

 And others employee to get the full information for clear understand the problem Moreovers, information from customers and competitors also be collected to futher reference

from August to December and was high distance with 2016 in same period More important, this was in the seasonal textile

The main reasons of decreasing gross profit margin are the revenue and cost of good sold:

For the operating revenue had reasonable decreased around 21% between 2016 and

2017, specially, the revenue in 2017 had trend rapidly went down from January (8,236 million) to December (6,866 million) Moreover, total SMT revenue 2017 was around 20% lower than QN Competitor Company; most important, SMT’s revenue had high distance over 35% with competitor in the fashion season (in supporting information)

The reasons make revenue decreased by the fluctuated PO (Production Order) The PO had same trend as revenue (in supporting information) In particular, the negative effecting

to PO and revenue is the loss of customer’s offers includes loyal and potential customers and in 2017 had lowest customer’s offers The total customer’s offers around were 2.744 and 2.121 for 2016 and 2017 More detail, in 2016, there were 1.950 PO (Production Order) from loyal customers, 764 PO from potential customers and 30 PO form others However, in

2017, there were 1.700 PO from loyal customers (down 13%), 401 PO from potentials customers (down 48%), and 20 PO from others only Furthermore, Mr Bang, Manager of sale and customer service department, also point that the product’s season and lack of reputation were a part of reason effect to customers offers decreasing

On the other hand, the cost goods of sold was calculated by three factors is material cost, labor cost and manufacturing cost, but the labor cost was stable The cost of goods sold went down around 10% between 32.793 million and 29.341 million This was due to the raising material cost and manufactory cost Follow the data accounting there were dramatically increased in 56% for material cost and 4% for manufactory cost such as repair and replaced equipment for machine Moreover, finance manager stated that company could not reuse waste material woven so policy control cost ineffective for material cost This lead

to the result of gross profit margin went down in 2 years

Material Cost Manufacturing Cost

2016 8,437,533,736 11,680,566,811

2017 13,200,332,658 12,129,623,444

Table: The material and manufacturing cost SMT

Conclusion, the symptoms showed such as decrease gross profit margin, revenue and the customer’s order Moreover, we can see the revenue decreased around 20% but COGS just fall down 10%, lower than revenue, so we can see the factor affect COGS as material and manufacturing cost was flexible changed Follow that symptoms above, this was the serious signal to urge me discover and clarify what was the main problem

2.3 Problem identification

2.3.1 Potential problem and validation

Although, SMT is one of the strong competitors, follow these company’s symptoms as gross profit margin also base on the literature and in-depth interview people in charge in business to claim that company had trend went down The potential problem clarified by review the theory and in-depth interview to confirm what is the central problem

Follow the theory by two studies that claimed the low quality service and product effect to customer satisfaction such as:

Kandampully (1) stated that quality of service, rather than price, has become the key to

a manufacturing’s ability to differentiate itself from its competitors and to gain customer loyalty and Nielsen (2) claim that companies increasingly look to quality, satisfaction, and loyalty as keys to achieving market leadership Understanding what drives these critical elements, how they linked and how they contribute to your company’s overall equity is fundamental to success By the way, as Customer service and sale admin shared that the brand value and reputation of company affected by the appreciated customers also Bontis

(3) found that customer satisfaction enhances reputation in the service environment The link between satisfaction and reputation has received minimal attention

In order to confirm, the Customer service and sale admin agree to in 2017 company get more complain from customers about not only the standard label lower the sample but also the way customer service staff solve the situation too late or usually miss the client’s email Therefore, the customer’s satisfaction had trend went down and influent the amounts of loyal and potential customers decreased in 2 years More detail, in 2016, there were 1.950

PO from loyal customers, 764 PO from potential customers and 30 PO form others However, in 2017, there were 1.700 PO from loyal customers (down 13%), 401 PO from potentials customers (down 48%), and 20 PO from others only

Conclusion, the result showed that the low quality product and service influence customers’ satisfy so company lack of reputation and lost loyal and potential customer in loss that make customer’s offer was decreasing It is definitely not a good business at all

The other side, each label must follow standard that were signed by 2 parties base on the sample about the size, color, and the amount of thread Follow directory factory shared the policy of company the percentage of product error make up 10% with the finishing product, but in 2017, there are 4 wrong label for 10 finish label it mean it over 10% That reason make the material cost in 2017 increase nearly double than 2016 from 8.437 to 13.200 million Clearly explanation the material cost is the expense buy material such as ink, yarn, satin, woven glue… the main material for make the label Another reason is the suppliers increase their cost when they sell for SMT Company

YARN QUOTATION IN 2016 - 2017 (VNĐ / KG)

VNĐ / Kg

Yarn VN903

Yarn VN903 (75/1)

Yarn VN002 White yarn Black yarn Silver yarn

Silver yarn TX-1

Silver yarn TX-22

2016 111,150 122,550 110,200 77,900 77,900 393,300 301,500 304,200

2017 117,000 129,000 116,000 82,000 82,000 437,000 335,000 338,000

In addition, he also stated company hadn’t tend to innovate machine so that the machine too obsolescence so we spent more time in manufactory process and usually break down in 2017, beside the guarantee machine cost, the manufacture cost such as the repair and replace tools of machine cost appear and had trend went up 4% between 2016 and 2017

In short word, the increasing in material and manufactory cost are the main reason make cost of goods sold in 2017 total higher than 2016 If this situation continues, the survival of SMT indeed is threatened

Lack of training in workplace

In human resource development, induction training is a form of introduction for new employees in order to enable them to do their work in a new profession or job role within an organization Training employees is the first step to help staff familiar with environment working All new employees need to train because it is important and affect to production efficiency

Follow JD Rogers, KE Clow, TJ Kash (4) stated that such responses on the part of employees would still tend to increase quality of customer service evaluations and customer satisfaction Thus, the problem may be both hiring the wrong individual as

a customer contact person and the lack of training on how to communicate ; and A Payne (5) showed that satisfaction with customer delight by offering service quality that exceeds expectations When a quality breakdown does occur and customers defect, it is important to establish exactly why A long wait at the post office may be due to inadequate staffing, lack of training Moreover, SE Fawcett, LM Ellram, JA Ogden (6) studied and presented that sources of dissatisfaction include a lack of managerial commitment, poor training of service personnel, poor measurement, and inflexible policies As a manager, some of the strategies you would consider/study to improve customer satisfaction

In addition, the director factory shared the few of staff lack of training such as time staff so they had no skill and work ineffective; hence, they make more mistake in working that make there were more and more product errors Surprisingly, the director factory did not impress this situation because this just the small factor affect in manufactory

part-In summary, the lack of training in workplace influenced to low label’s quality and skill of worker in manufacturing process that make number of wrong label increased That chain was influence gross profit margin However, as director factory confirm that was just

the small problem so lack of training in workplace did not the important problem effect to Business Company

Management method ineffective

Management system one of the basic factors contributes to speed up the improvement quality of products and service Managers must know how to encourage employees understand that quality assurance and improvement is not part of any department, that it must be the overall responsibility of the whole enterprise The quality of the management activities is a reflection of the quality of the company's operations Therefore, the management system inefficient is lead to low quality service and quality product

As Hillary (16) point out, numerous organizational improvements and efficiencies achieve in the environment management system (EMS) from the adoption of an EMS and are not solely relate to the EMS, i.e spin-off management benefits arise from the implementation of an EMS For example, quality systems improved as product and service

To confirm the CEO shared that quality service and product is so important and first factor affect to the business We should consider about management system, we must control and encourage staff attitude, the way they working such as follow the PO, replies customer email and takes care customers the accurate reports By the way, we must control the quality outcome such as the synchronization of labels

However, SMT Company has strong power management system; they creased the professional environment and human resources had each policy for each department, the evidence to prove is the turnover rate of human resource as HR manager shared, is the minority so management method ineffective is not the main problem in SMT Company

Poor Innovation Activities

Innovate machine and technology is the active action to replace current machine, technology by modern ones in order to enhance the productive business Nowadays, the role

of technological innovation is the top strategy to help company reduces expenses, improves quality product and reputation If company’s innovation behavior was poor, company will

get some disadvantage about manufacturing process and expand market, create new products

In the study, there were some people pointed the huge affection of strategy lack of technological innovation about quality product and customer’s satisfaction For example, Joseph Schumpeter (7) argued that economic growth requires innovation technology -the generation of higher quality products at lower unit costs than had previously been obtainable Shan-Chun Lee Sunita Barker and Jay Kandampully (8) claim technology is found to have affected the ability of company to support employees, enhance the quality of product, improve efficiencies, gain competitive advantage, maintain relationships with customers, and increase profitability and technology provides an organization with a better way of doing things - thus benefiting the firm, its employees, and its customers By the way, the innovate machine, technology still relate with the cost through G Mert, S Waltemode (9)

technology can also support low-cost producer strategies Companies that eliminate, for

example, costly aspects of their product delivery processes can pass the savings on to customers Moreover, Textile Industry Association pointed that our country had over 3.700 textile companies but there were 50% company were using old-date machine, technology over 15-

20 years longer than Thailand and China country That makes increase waste material and population In other word, company should innovate machine instead handicraft in order to enhance correctly product

On the other hand, Omar Licandro (15) found that side from expansionary behavior, the innovative behavior of firms is the central issue Non-innovative firms expected to face a small trend in productivity, at least compared to those firms declaring to be frequently engaged in innovative activities and replacement activities in non-innovative firms may guide mainly by physical depreciation

In order to confirm, the directory factory claimed that this current main chain machines were too old, it spent more time to produce label With high demand orders, we had to make

in hand because current power-loom machine could not make or make wrong label so that did not meet up the standard labels By the way, the main chain machines was bought over

10 years, it was end up depreciation so it usually broke down and company must paid expense to repair However, he did not get any decision replace or innovated machine, technology from board director

2.3.2 Central Problem

The last section showed that SMT is poor innovation activates in machine and technology, now the next section will collect more data from the second interview with Ms Wanpen, CEO at SMT in order to justify the existence of the central problem

Ms Wanpen emphasized that has not really paid much attention to innovate machine and technology because any reasons She also claims the status of factory machine:

LOW QUALITATY

OF PRODUCT

LOW QUALITATY

OF SERVICE

MORE PRODUCT ERROR

SKILL OF WORKERS

DECREASE PROFIT MARGIN

DECREASE CUSTOMERS’S OFFER

INCREASE COST

OF GOOD SOLD

LACK OF REPUTATION AND BRAND VALUE

LOST LOYAL AND POTENTIAL CUSTOMERS

INCREASE THE MATERIAL COST

INCREASE THE MANUFACTURY COST

LOW CUSTOMERS ‘S SATISFACTION

INCURRED REPAIR THE MACHINE COST

INCREASE BUY MATERIAL

INCREASE SUPPLIERS COST

“In main chain machine, we have 26 power-loom machine included buy 20 pcs in 2003 with degraded 75%, productivity only 45% and 6 pcs in 2010 with degraded 15%, productivity only 85%

Before, machine was imported from different country such as 45% Thailand, 30% China, 20% other Asia country so the homogeneity is weak Because less homogeneity and degrade machine, company face with difficult in buying replace accessories, low productivity, waste the material, production norm is old and improper but did not change.”

Moreover, Mr Bao – factory manager stated that:

“Absolutely, there are 70% quality of product depend on machine manufacture When company concern innovate machine, the quality of label will be improved also reduce the product error, spend working time and more productive Moreover, company can expand and meet up high standard label However, the strategy innovate machine still consider and did not execute, develop.”

Same as conception with Mr Bao, she also pointed out the negative affection as unsatisfied customers about qualitied of product and sample and over the control cost in manufacturing:

“Our kind of business is manufacturing industry, so we depend on too much about running machine and technology The innovative machine and technology huge effect to our business such as:

We will increase the productivity include quality and quantity With the modern main chain machine and technology, company will save the material cost for each unit product and less the material wastes Moreover, the manual workers decrease and impact to expenses about worker’s salary will decrease That help company can get the lower cost of goods sold so company can easy sell with the reasonable price, access the more markets Therefore, revenue and profit will increase

Beside the saving the cost, the quantity and quality of product will be went up, that can meet

up the hard requirement of market about sample, branch The status low price but high quality is so meaningful and strong power in current competition.”

Conclusion, company wants to get the profit target and enhance the reputation, company have to improve the productivity, quality product and reasonable price That is similar with duty; company needs change and innovating the machine and technology

After the meeting and in-depth interview with the CEO, CFO, Chief Accountant, Director factory of SMT company and base on theory also data collected, the central problem is company’s innovation behavior was poor In the strategy business, they had no plan to concern and replace or upgrade the machine, technology to meet up demand of customers

POOR INNOVATION BEHAVIOUR

DECREASE CUSTOMERS

’S OFFER

INCREASE COST OF GOOD SOLD

LOW QUALITATY OF PRODUCT

INCURRED REPAIR THE MACHINE COST

MORE PRODUCT ERROR

CHAPTER 3: CAUSES AND UPDATED CAUSE-EFFECT MAP

From that main problem, there are three cause problems and the concise cause-effect map of this main problem showed below:

3.1 Potential causes and validation

Lack of the capital resources

Nowadays, in the competitive industry business, the innovate machinery and technology was important requirement That is the one of challenge for not only small companies but also SMT Company that lacks of the owner’s equity

Follow Maryann (11) stated that in the modern economy, locational advantage in the capacity to innovate technology is ever more dependent on the agglomeration of specialized skills, knowledge, institutions, and finance resources that make up an underlying technological infrastructure Aghion (12) claimed that while other sectors typically quote high innovation costs and access to finance as the main barriers to innovation and another classical barrier to innovation is access to finance Financial constraints will be even more limiting for green innovations, especially the more breakthrough type of green innovation,

because such innovations carry a high technical risk/uncertainty but also important for green innovation is the higher commercial risks arising from uncertain market conditions The combination of technological and market uncertainties will be particularly important for early-stage green technologies As there are often introduced by small-scale, radical innovators lacking collateral and reputation, such young, radical green innovators may be particularly held back by financial constraints Veugelers (13) also showed that Subsidies are particularly important in the early phases of development of new technologies, for addressing the installed-base disadvantage of new technologies and the financing barriers faced by new innovators

To clarify, the director factory pointed out there were 20 in 26 power-looms machine is too old, slow working and usually broken totally, we need to buy the new ones instead of upgrade or replace the tools By the way, follow the detail table below from sharing of chief accountant:

(Set)

Year start using

Total cost

1 The power - loom 26 2003 & 2010 33.566.590.385 60%

2 The cutting machine 18 2003 & 2010 7.066.482.476 13%

It is easy to see that the old price of power-loom machine around 1.29 million VNĐ per set but the price for ones around 70.000 USD/set (over 1.61 million VNĐ) in 2017 Therefore, with 20 sets was need to replace, company need over 32 billion However, the owner’s equity just around 38 billion (include the current fix assets) In this case, as chief accountant claimed that seriously company lacked of owner’s equity so company should

supported by the bank loan Furthermore, with the small company like SMT, company hard

to access the bank loan because small-scale production also limited mortgages

In summary, when company wants to execute innovate machine and technology, they will faced the finance problem Therefore, lack of the capital resources is one of the cause problems of SMT Company

Lack of skilled workers

The effective human resource is huge and no limited like other resources The human resource is the main factor for the effective business and its support the develop company also that is the strong point for company decide on invest new strategy If company had well-trained employees resource combine with good effective management, company can save some expenses such as material cost, management and training cost, enhance labor productivity

Follow Erik Brynjolfsson Director (14) claimed that we want to focus on recommendations in two areas: improving the rate and quality of organizational innovation, and increasing human capital— ensuring that people have the skills they need to participate

in today’s economy, and tomorrow Making progress in these two areas will be the best way

to allow human workers and institutions to race with machines, not against them and Training to sustain ongoing use and stimulate future expansion of technologies, training is paramount

Moreover, follow the sharing of human resource manager, in 2017 workload of SMT Company had near 200 employees include staff in office and factory

The pie chart presented the percentage number of employees in office and factory

We can see there are 12% (25 people) work in office for some department as sales, customer service and accounting who from 23 – 55 years old and graduated college and university With 88% (175 people) in factory had 5 managers and 167 unskilled worker and only 3 well-trained workers who is foreigner and can use the complex set of machine, but they will retire in 2 years Therefore, he emphasized that workload in company is lack of the well-trained employees to operate the chain main machine Those leads to the problem why strategy do not focus on invest the machine in 2017

This is the true problem of company, manager of factory also shared that the salary policy of company not attractive employees foreigner to work in Vietnam for long time so company organize some training program but almost current employees was be fail and few staff pass, they transfer to other company have more attractive environment working Moreover, match with sharing of chief accountant that because SMT in crisis period, in

2017 revenue rapidly decreased in 20% than 2016, so company cut-off the workload in order to reduce the labor cost so with the salary offer from foreigner, company could not approve

Conclusion, although SMT Company had strong human resource as their employees had knowledge also experience meet up requirement, they lack of the well-train staffs to control the main chain machines and technology In short, the lack of well-trained workforce

is one of the most cause problems in business

The power of director

The CEO who highest position and has right to decide any strategy in SMT Company is foreigner comes from Thailand country so the different culture between 2 countries is the limitation about conception in business That lead to the problem as sale

manager stated that all working activity in company depend on CEO too much so we are impassive to develop innovate technology strategy

This is one of the most problem importance and affect to the company business

because this problem was depended on personal attitude so I cannot control and over my role Therefore, it seem that there no solution for this cause problem

3.2 Central causes

Based on above discussion and validation, among three factors, it can obviously recognized that lack of the capital resources and lack of skilled workforce are proved to the key reason of poor innovation activities because of its impact on decreasing profit margin in SMT business performance Through accounting and sale department’s records collected by confirmation from insiders of factory and office, we can get more deep insights of their view

of points and perspective on those issues together with group discussion and literature review

The importance of financial resources and skilled labor in the innovation activities:

- The use of financial capital also seemed as an input in the production function The capital resource have important role such as follow Gertler (17) financial resource is the condition

to maintain manufacture, upgraded technology, expand business, improve the quality product … so first, financial resources is the main tool for company conduct the business strategy Second, capital business for the relationship of business support between business

in the problem Finally, capital business for the selection of the business options in the parsing like the field market is: determine the output what? for the best performance

- The workload also the main factor to contribute the company development especial is skilled- workers Follow Joe Hannsen (17) skilled worker is any worker who has special skill, training, knowledge, and (usually acquired) ability in their work Skilled labor is key for innovation in firms: skilled labor can contribute to innovation and growth by generating new knowledge, developing incremental innovations, supporting firms in the identification

of business opportunities, helping companies adapt to changing environments, generating

spillovers (transfer of knowledge to co-workers) within the organization and adding to social capital

As Ms Wanpen – CEO SMT admitted and emphasized that

“We lack of some important factors such as finance, workload, the effective project, … to conduct the innovation plan…” and “we need loan the banks but with the small company like SMT, we hard to access the good loan bucket because small-scale production and limited mortgages

Other hands, company lack of well-trained staff In participant, the human resource of SMT near 200 employees includes office and factory There are 3 well-trained Thailand staffs only that can use the complex set of machine.”

Summaries, capital resource and skilled- workload is two important factors affect the business company, company should find the positive potential solution in order to innovate activates to upgrade machine and technology

CHAPTER 4: ALTERNATIVE SOLUTIONS

Through these cause problems from poor innovation activities at company, SMT gave some potential direction for all departments to propose the best solution for action plan

Base on the theory and interview the top people in charge, there are potential solutions that SMT Company should refers and conducts the plan to enhance the capital resource and improve the workload’ skill

4.1 Solution 1: The Finance Leasing

The financial barrier is always main problem with companies Normally, in order to raise capital to upgrade machines and technology, they have trend to mobilize the funds of the bank or the credit agency Therefore, toward the small company and hard to access to finance like SMT company, there are 2 potential solutions:

- The business loan: is the popular solution when company face with the limit

capital resource Follow Gangopadhyay (18) explained that a business loan is

a loan specifically intended for business purposes As with all loans, it involves the creation

of a debt, which will repay with added interest There are different types of business loans, including bank loans, mezzanine financing, asset-based financing, invoice financing, microloans, business cash advances and cash flow loans

- The finance leasing: follow Vancil's groundbreaking article on lease analysis

(18) claimed, “The financial lease is defined as a contract under which the lessee agrees to make a series of payment to the lessor which in total, exceed the purchase price of the asset acquired Typically, payments under a financial lease spread over a period equal to the major portion of the useful life of the asset acquired During this initial term of the lease, the contract is non-cancelable by either party; that is, the lessee is irrevocably committed to continue leasing the asset”

The table below is list of the basic different between the bank loan and the finance leasing:

Kind of project

Lands, machines, equipment, transports, factory … (for long term)

Machine, factory, transport, equipment… no land

Description

 The mortgage asset

 The appraise time

However, the owners’ equity is around 38 billion Therefore, we need loan the banks

but with the small company like SMT, we hard to access the good loan bucket because small-scale production and limited mortgages…”

In addition, finance leasing bright more advantage than buying like Schallheim, Johnson, Lease, and McConnell (19) claim that the fact that these firms chose to lease assets rather than to borrow to buy them indicates that other benefits, such as capital market access and lower bankruptcy costs, play an important role in the leasing decision Additional, Krishnan, V S., & Moyer, R C (20) still said that rapidly growing firms also expected to make greater use of lease financing, when the choice is between lease financing and debt financing Myers (21) present that lease financing may be preferred because of the lower required down payment (equity commitment), relative to debt financing, at the inception of

the transaction The "down payment" with leasing normally is equal to only one-month lease payment, an amount that is less than the typical loan down payment Hence, lease financing often may be the only financing alternative to equity for rapidly growing firms

Accordingly, some benefits and costs when conduct the finance leasing process is described as below:

Benefits:

Follow the Viettinbank supervisor suggest and authors such as Maire Loughran (23), Bhalla

VK (24) and Sherman AJ (25) list out of some finance leasing’ s benefits:

 Balanced Cash Outflow: The biggest advantage of leasing is that cash outflow or

payments related to leasing spread out over several years, hence saving the burden of one-time significant cash payment This helps a business to maintain a steady cash-flow profile

 Quality Assets: While leasing an asset, the ownership of the asset still lies with the

lessor whereas the lessee just pays the rental expense Given this agreement, it

becomes plausible for a business to invest in good quality assets that might look

unaffordable or expensive otherwise

 Better Usage of Capital: Given that a company chooses to lease over investing in an

asset by purchasing, it releases capital for the business to fund its other capital needs

or to save money for a better capital investment decision

 Tax Benefit Leasing: Expense or lease payments are consider as operating expenses,

and hence, of interest, are tax deductible

 Better Planning Lease: Expenses usually remain constant for over the asset’s life or

lease tenor or grow in line with inflation This helps in planning expense or cash

outflow when undertaking a budgeting exercise

 No Risk of Obsolescence: For businesses operating in the sector, where there is a

high risk of technology becoming obsolete, leasing yields great returns and saves the business from the risk of investing in a technology that might soon become outdated For example, it is ideal for the technology business

 Termination Rights: At the end of the leasing period, the lessee holds the right to

buy the property and terminate the leasing contract, thus providing flexibility to

business

Costs:

Company chooses Viettinbank to conduct the finance leasing because they have reasonable

interest with 4.5% and lease in 20 years so conduct the process conveniently

Total amount expense (20 sets

The bank accepts 80% on total expense 80% x 1.400.000 1.120.000

The company deposits 20% for leasing

Company pay principal each year 896.000 / 20 44.800

The payment leasing each year for 20

year (if interest is constant) 86.101 + 44.800 130.901

Conclusion, innovating 20 set the power-loom to enhance running business, SMT should apply the finance leasing because it situation for invest chain machines, technology which import from foreign country with huge capital Besides, there are more banks have finance leasing service with convenience process such as do not mortgage assets, long time leasing, low interest and sponsor over 80% assets

4.2 Solution 2: Built up the training process and policy

Training the high quality human resources in SMT Company is the main mission to meet requirement of socio-economic development Finding solutions to advance the quality

of vocational training is especially important It’s so help the organizations have foundation

to develop worker training to meet requirement of demanding labor market

- Applying the attractive foreign policy about salary and allowance: The labor that

has more skill and experience attracted by high company’ policy such as welfare, environment working and salary is most important So that, if company want to employ and keep the skilled workers, they should change and focus on company’ policy proper with current situation Nevertheless, the weakness SMT is not enough funds to build up the salary higher and more attractive foreigner- workers so they only can use current labors in VN country

- Built up the training process and policy:

 Heighten the awareness about training skills and knowledge Change the labor’s conception let them know the skill and knowledge are important Through company propaganda or held the meeting, talk show about with the empirical people who has been working in famous industry and got more information and experience annually, it’s affect both their interest and the company’s requirement to make sure that the income will increase and built up the training process and policy for country

 SMT should improve the training process for worker Specifically, company built up the training process and policy such as originate courses about guiding the working

- skills for workers, held the competition for employees have chance to learn experience and evaluate themselves also company can recognize the potential workers, by the way, company should nominate the talent workers to study aboard to improve their skill and contribute for company That helps potential workers have chance familiar with main chain machine and technology In the future, they will become the well-trained labor and would be replaced the current skilled labor also they will become the trainer for the new employees